UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number:
December 31, 1996 0-10211
INTER-TEL, INCORPORATED
Incorporated in the State of Arizona I.R.S. No. 86-0220994
120 North 44th Street, Suite 200
Phoenix, Arizona 85034-1822
(602) 302-8900
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(12,951,163 shares outstanding as of March 14, 1997)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (S 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K - [ ].
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the last reported sales price in NASDAQ National
Market System on March 14, 1997, was approximately $149,000,000 Shares of Common
Stock held by each executive officer and director have been excluded in that
such persons may be deemed to be affiliates.
Materials have been incorporated by reference into this Report from the
following documents: (1) materials from the registrant's Proxy Statement
relating to its 1997 Annual Meeting of Shareholders have been incorporated by
reference into Part III and Part IV and (2) documents from the registrant's Form
S-1 Registration Statements (Nos. 2-70437 and 33-70054), Form S-3 Registration
Statements (Nos. 33-58161, 33-61437, 333-01735 and 333-12433), Form S-8
Registration Statements (Nos. 2-94805, 33-40353 and 33-73620), Annual Reports on
Form 10-K for the years December 31, 1984, 1988 and 1994, and current reports on
Form 8-K dated July 17, 1987, August 3, 1988 have been incorporated by reference
into Part IV, Item 14. Portions of the Annual Report to Shareholders for the
year ended December 31, 1996 are incorporated by reference into Part II.
INTER-TEL, INCORPORATED
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Item 1 Business 3
Item 2 Properties 20
Item 3 Legal Proceedings 21
Item 4 Submission of Matters to a Vote
of Security Holders 21
PART II
Item 5 Market for the Registrant's Common Stock
and Related Stockholder Matters 21
Item 6 Selected Financial Data 21
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Item 8 Financial Statements and Supplementary Data 21
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 21
PART III
Item 10 Directors and Executive Officers of the Registrant 21
Item 11 Executive Compensation 22
Item 12 Security Ownership of Certain Beneficial Owners and Management 22
Item 13 Certain Relationships and Related Transactions 22
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 22
2
PART I
ITEM 1. BUSINESS
The Company
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Readers are cautioned that such statements are only
predictions and involve risks and uncertainties. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the risk factors set forth under "Factors That May Affect Results of Future
Operations" below and elsewhere in this report.
Inter-Tel, incorporated in Arizona in 1969, is a single point of
contact, full service solutions integrator providing AXXESS and Axxent digital
business communication platforms, AXXESSORY Talk voice processing platforms,
call processing and voice processing software along with various other
productivity enhancing software applications, computer telephone integration,
and network services and long distance calling services, as well as maintenance,
leasing and support services. The Company's Common Stock is quoted on the Nasdaq
National Market System under the symbol INTL.
The Company has developed a distribution network of direct sales
offices, dealers and value added resellers (VARs) which sell the Company's
products to small-to-medium-size organizations and to divisions or departments
of larger organizations, including Fortune 500 companies, large service
organizations and governmental agencies. The Company has 29 direct sales offices
in the United States, one in the United Kingdom, one in Japan and a network of
hundreds of dealers and VARs who purchase directly from the Company. The Company
is also in the process of expanding its international dealer network.
The Company's strategy is to offer to its customers, through a broad
distribution network, the total solution for their communications needs--a
single source for their full range of telephony requirements, and to provide to
its market segment, on a cost-effective basis, advanced technologies that have
achieved acceptance in the market for larger systems.
Products and Services
The Company's current and planned products and services span the
following portions of its market segment:
o Digital Communication Platforms
o Computer Telephone Integration
o Voice Processing Software
o Internet Connectivity
o Networking Technologies
o Network and Long Distance Services
o Flexible Financing
The market for the Company's products and services is characterized by
rapid technological change and continuing demand for new products, features and
applications. See "Factors That May Affect Results of Future Operations -- Rapid
Technological Change and Dependence on New and Timely Product Introductions."
Digital Communication Platforms
Inter-Tel offers an extensive line of digital communication systems,
including hardware platforms and C++ software applications, which meet the
requirements of most businesses. Because these platforms are based upon open
architecture and conform to established computer
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and telephone industry standard programming interfaces and protocols (such as
TAPI, TSAPI and TCP/IP), customers can choose from a variety of either
system/server level or desktop applications. In addition, advanced digital
technology, such as T-1 and ISDN services, are used with Inter-Tel's platforms
to provide some of the best communication services available.
Inter-Tel's flagship product, the AXXESS platform, incorporates
advanced technology for computer and telephone integration providing businesses
with the ability to customize applications to enhance their operations and
increase productivity.
Future enhancements to the current AXXESS platform will allow the
system to accommodate virtually any size requirement. Through fully transparent
digital networking, two or more systems can operate as one, supporting several
thousand devices.
Another product reflective of Inter-Tel's evolution toward server-based
technologies is the Call Server. Designed as a Windows NT telephony server, it
incorporates AXXESS call processing software, with its powerful call processing
features and CTI potential, plus selected Internet services and unified
messaging software all in one computer industry standard X86 server. The
Vocal'Net will use both proprietary Inter-Tel digital terminals and single line
telephones. The Vocal'Net server is designed for medium to large businesses. It
allows for better management of data and telecommunications networks while
providing integrated TCP/IP intranet and Internet voice connectivity.
AXXESS
The Company commenced commercial shipments of the AXXESS system and
software in the fourth quarter of 1993. In 1996, the Company released AXXESS
version 4.1, which expanded the system to 512 ports and added such advanced
capabilities as primary rate ISDN support, integrated call recording, voice
prompts in multiple languages, and a Windows 95-based Attendants Console.
The system incorporates fully-digital processing and transmission to
the desktop and open architecture interfaces which allow the system to be
integrated with and controlled by attached computers such as PCs and
workstations. The system incorporates over one million lines of proprietary,
object-oriented C++ software developed by the Company, which facilitates
upgrades and incorporation of additional features and functionality.
AXXESS system telephones incorporate user-friendly, 6 by 16 character
LCD displays with menu keys that permit the user to select from multiple menu
choices or access additional menu screens. AXXESSORY Talk, the integrated voice
processing application, permits push-button selection of voice processing
commands to appear on the telephone's LCD display, as well as voice-prompted
selections through the telephone keypad. The AXXESS system is multi-lingual,
offering English or Japanese voice prompts and LCD displays and allowing the
user to switch from one language to the other. Additional languages can be added
in the future.
The open architecture interface permits tight integration with a PC or
workstation system bus, using several industry-standard interfaces to provide
efficient access to voice processing and other applications on the PC or
workstation. Applications include database look-up (which utilizes Caller-ID
information to retrieve customer information automatically from a computerized
database), automated attendant, interactive voice response, automatic call
distribution (which queues and prioritizes incoming calls), and call accounting
(which permits the monitoring of telephone usage and toll cost). The AXXESS
system is managed through a
4
Microsoft Windows-based graphical user interface on a PC to facilitate
installation, system configuration and programming.
The AXXESS system utilizes advanced software to configure and utilize
real-time digital signal processing ("DSP") semiconductor components
incorporated into the system hardware. The use of DSPs and related software
lowers system costs, permits higher functionality and increases system
flexibility. For example, DSPs can be configured by the system manager for
different combinations of speakerphones, conference capabilities and other
DSP-based facilities. The system's speakerphones incorporate full-duplex
technology, which permits speakerphones to transmit in both directions at the
same time without the necessity to override one speaker's voice to prevent
feedback interference.
The AXXESS software is written in a high-level, object-oriented
language which can operate on many commonly used processors. Accordingly, the
software can be readily ported to other hardware platforms. The Company intends
to port the AXXESS software to faster microprocessors which will permit the
AXXESS to grow to a much larger size, in order to enhance the functionality and
performance of these larger systems and to permit a migration path from the
smaller AXXESS system as a customer's system requirements increase.
Inter-Tel Axxent
The Company introduced its newest product line, the Inter-Tel Axxent,
in the third quarter of 1995. The system originally supported 16 lines and 8
trunks. Software version 2.0, released in third quarter 1996, increased the
system capacity to 24 lines and 12 trunks. Small businesses are demanding
advanced telephony applications formerly reserved only for large corporations.
The Inter-Tel Axxent is designed to bring many of the advanced features and
functionality of the AXXESS system to smaller installations on a cost-effective
basis while enabling users to migrate to an AXXESS system as their
telecommunications needs evolve. The Inter-Tel Axxent provides capabilities such
as computer telephone integration, DSP technology, real-time ACD reporting, and
integrated voice processing. Housed in a compact PC type mid-tower, the
Inter-Tel Axxent platform also offers the convenience of a default database so
the system is fully operational as soon as it is plugged in. Basic database
programming can also be performed through the digital telephone terminals. The
system is sold through direct sales offices and direct dealers to professional
businesses such as doctors, lawyers, and architects.
In addition to its line of digital communication platforms, the Company
continues to have success in its direct sales offices and dealer distribution
channels with its traditional IMX and G-Series family of products. These
products economically bring advanced communication services to the Company's
customers, however, without the advantages of the open architecture capabilities
of the AXXESS and Inter-Tel Axxent. These products include:
o GLX and GLX+
o GMX-48
o IMX 1224/2448/2460
o IMX/GMX 256
o IMX/GMX 416/832
Inter-Tel also distributes other leading telecommunications products
from its Factored Products Division through its direct sales offices, dealers
and VARs. Factored Products represents products that Inter-Tel has endorsed as
the leading communications peripherals utilized in many day-to-day functions.
Businesses require telecommunications products to provide increased
productivity, ease of operations and reliability. Many of these products
interface with
5
Inter-Tel telephone systems. Inter-Tel's product selection consists of
videoconferencing, battery backup, headsets, surge protection, paging equipment,
wireless communications and data multiplexers.
Computer Telephone Integration (CTI)
Through Computer Telephone Integration (CTI), two of the most important
business tools--the computer and the telephone--are linked into one environment
to provide streamlined business processes and enhanced customer service.
With CTI technology and Inter-Tel's industry-standard communication
platforms and C++, object oriented, call processing software, users can be
better prepared to answer incoming telephone calls. With Inter-Tel's AXXESSORY
Connect software for the AXXESS system and local Caller I.D. information, users
can accept phone calls through their desktop PC. Caller information can appear
on the screen even before the call is answered. On an individual desktop or a
company-wide network basis, Inter-Tel offers a variety of products, such as
AXXESSORY ACD, that can manage automatic call distribution at peak efficiency or
route incoming telephone calls, based on various parameters, to a specific
person. It can also collect, analyze and report real-time call processing
information for staff forecasting and analysis.
Certain of Inter-Tel's software applications can also integrate with
other "off-the-shelf" Windows applications such as personal information
managers, call routing or call management software that can further enhance
customer service while increasing call efficiency and employee productivity.
Inter-Tel has partnered with a number of third party software developers to
integrate with their existing applications to create a working environment for
database, personal organizer, or terminal emulation programs.
If these "off-the-shelf" applications do not completely meet the needs
of a customer, the open design of Inter-Tel's software allows independent
software developers to write custom applications through Inter-Tel's Developer's
Program. Or, Inter-Tel's CTI Solutions Group can provide professional consulting
services or development of individual customer applications, for either desktop
or Local Area Network ("LAN")-based applications.
Call management applications that were once reserved for large call
centers, such as airline reservation centers or banking operations, are now
available and affordable from Inter-Tel for most businesses. The Company intends
to design future enhancements to integrate LAN-based solutions on a Windows NT
Server.
Voice Processing Software
Inter-Tel's AXXESSORY Talk, Axxent Talk, and the IVX500 are all voice
processing platforms that work with Inter-Tel's communication platforms. All
three applications use the Multi-Vendor Interface Protocol (MVIP), an industry
standard for connecting multi-vendor PC-based boards in voice processing, data
switching and video systems.
Future enhancements to AXXESSORY Talk, the voice processing software
for the AXXESS platform are planned, including the ability to program and
schedule multiple voice mail greetings, cancel unheard messages, detect and
route incoming faxes to a specific extension and the ability to automatically
return a call from voice mail by using Caller I.D.
6
As the need to merge different types of messages continues to evolve,
Inter-Tel is developing unified messaging software, scheduled for release in the
third quarter of 1997. By using standard electronic mail gateway technology,
Inter-Tel's unified messaging software will be designed to enable the
integration of all types of messages into a single user interface on a PC,
supporting internet e-mail and major electronic mail packages including
Microsoft Mail, Microsoft Exchange, Lotus Notes and cc:Mail. Integrating e-mail,
fax and voice mail through one message management interface at both the PC and
the phone could allow users to easily see and control all different types of
messages that have been received.
Inter-Tel is developing unified messaging software to work in
conjunction with the Microsoft Exchange messaging application, included with
Windows 95 as well as Microsoft's new Outlook product. Inter-Tel's unified
messaging software will conform to the Messaging Application Programming
Interface (MAPI) standard developed by Microsoft and will work with the
AXXESSORY Talk digital voice processing platform.
Inter-Tel's unified messaging software should provide yet another means
for improving workplace productivity and retrieving messages anywhere from a
phone or a PC connected to a modem.
Internet Connectivity
With the advent of Internet telephony, more companies are relying on
the Internet for the delivery of streamlined marketing, sales and customer
support, as well as affordable alternatives to fax, express mail and other forms
of global communications. In 1996, Inter-Tel developed the Vocal'Net Server.
The Vocal'Net Server, scheduled for commercial release in the summer of
1997, is a stand-alone Internet telephony solution available for use with the
AXXESS system or virtually any business telephone system equipped with T-1
capability. It provides a gateway for bridging the public telephone network and
a company's intranet or the Internet. With the Vocal'Net Server, users will be
able to conduct real-time, full-duplex, high-quality, two-way voice
communications over the Internet, for potential savings compared to standard
long distance phone service. Designed to meet the needs of most businesses, the
Vocal'Net Server will be available in multiple port sizes.
The Vocal'Net Server does not require customized telephone sets or
specialized software and cards in each desktop computer. Furthermore, the
Vocal'Net Server does not rely on the central processing unit of the computer
for the compression or packetization of information. Therefore, the server may
be able to handle additional functions as well.
Because Internet telephony converts all transmissions to the same type
of packets, both voice and data can use the same data circuits, thereby reducing
backlog on the data circuits and increasing efficiency. Bandwidth is maximized
to a point that some users may be able to reduce the overall number of circuits
needed.
The Vocal'Net Server is designed to allow businesses to create virtual
offices, enabling traveling or off-site employees to connect to the main office
from anywhere in the country or the
7
world. All that is needed is a laptop computer and the number of a local
Internet Service Provider to receive multimedia messages and to place calls over
the Internet. Another application is "Touch-To-Talk" telephony-enabled web
pages, which allows users to automatically connect over the Internet to talk to
customer service agents.
In its initial commercial release scheduled for mid-1997, the Vocal'Net
Server will be designed to work with business telephone systems that support E&M
signaling over T-1 lines and to handle up to 24 simultaneous calls, offering
advanced Internet telephony technology. Future planned enhancements will include
industry standard compatibility (H.323) for integration with PC-based software
applications and other types of gateways as well as a fax gateway to provide fax
and broadcast fax capabilities across the Internet.
Networking Technologies
To develop a solid foundation for state-of-the-art data and
telecommunications networking, customers require strategic network expertise
from their networking provider. Designing, installing and supporting the
complete integration of a customer's complex data and telecommunications
network, from land-based LANs to geographically dispersed Wide Area Networks
(WANs), is a key goal of Inter-Tel.
By forming alliances with major manufacturers of hardware and software
technologies, Inter-Tel is working to provide the routers, ATM, LAN and WAN
switches, file servers, intelligent hubs and any other device required for the
customer's intranet or for usage of the Internet. Pre-sale design support,
project coordination for implementation, and installation support are offered on
the full line of Inter-Tel server-based telephony products and services.
Network and Long Distance Services
The enactment of the Telecommunications Act of 1996 greatly impacted
both the telecommunications industry and NetSolutions, Inter-Tel's network and
long-distance services provider, by opening telecommunications markets to local
and private carriers.
Working with domestic and international carriers, Inter-Tel
NetSolutions offers a wide range of voice, data and video services. Using
state-of-the-art technology, such as digital fiber optics, NetSolutions offers
services that include domestic and international long distance, dedicated
services such as frame relay and private line circuits, and pre-paid and
traditional calling cards.
Call centers using T-1 access for incoming toll-free traffic, sales
offices using NetSolutions' switched long distance or companies linking multiple
offices throughout the country on a frame relay network are examples of the
applications currently supported by Inter-Tel NetSolutions. Whether it is
toll-free service or WAN design, Inter-Tel NetSolutions is capable of handling a
broad spectrum of telecommunications needs.
Inter-Tel NetSolutions intends to offer local service, Internet access
and wireless products, thus continuing Inter-Tel's evolution as a total solution
provider. However, these services are not currently provided, and there can be
no assurance that the Company will be able to provide these services in the
future.
8
Flexible Financing
An integral part of bringing the total solution to the customer is to
provide a range of affordable financing programs in one flexible and convenient
package. With Inter-Tel, customers can acquire their telephony and computer
platforms, software applications and network services, as well as financing, all
from a single source.
Inter-Tel's Totalease program provides qualified customers with that
total solution for their telephony products. The Totalease program includes full
system maintenance and training, fixed equipment add-on and upgrade provisions,
risk of loss, guaranteed renewal options and other services, all at a fixed
monthly cost. With Totalease, Inter-Tel manages the responsibilities and risks
associated with ownership of communications equipment.
Inter-Tel also offers a line of low cost lease purchase financing.
Lease terms range from 24 to 84 months with $1.00, fixed and fair market value
purchase options. In addition, Inter-Tel will customize financing packages to
suit customers with special financial needs. By offering this type of financing
to acquire Inter-Tel products and services, Inter-Tel provides the customer with
the comfort of predictable monthly costs and the security of a direct, long term
relationship with Inter-Tel.
Sales and Distribution
The Company has developed a broad distribution network of direct sales
offices, dealers and value added resellers (VARs) which market the Company's
products to small to medium size organizations and divisions or departments of
larger organizations. In the United States, the Company has 29 direct sales
offices and a network of hundreds of dealers who purchase systems directly from
the Company. Direct dealers are typically located in geographic areas in which
the Company does not maintain direct sales offices. The Company is additionally
pursuing distribution of its products through value added resellers (VARs).
These resellers have traditionally sold complex data solutions to customers, and
the Company is seeking to leverage this distribution network to capitalize on
the merging of the computer and telephony industries. The Company maintains a
dealer support office and direct sales office in the United Kingdom and has a
network of approximately 20 dealers in the United Kingdom and Europe. In
addition, in 1993 the Company opened a dealer support office and direct sales
office in Japan and is in the process of establishing dealers in Asia.
The Company believes that its success depends in part upon the strength
of its distribution channels and the ability of the Company to maintain close
access to its end user customers. In recent periods, the Company has sought to
improve its access to end user customers by effecting strategic acquisitions of
resellers of telephony products and services in markets in which the Company has
existing direct sales offices and in other strategic markets. To this end, in
1996 the Company acquired Florida Telephone Systems, Inc. and NTL Corporation
(dba ComNet of Ohio). The Company has expanded its direct sales office personnel
from a total of 332 persons at December 31, 1992 to a total of 795 at December
31, 1996.
The Company's sales through its direct sales offices as a percentage of
total sales have decreased from 62.1% of net sales in 1993 to 56.4% of net sales
in 1996. Sales to distributors, dealers, and VARs have increased from 29.6% of
net sales in 1993 to 31.5% of net sales in 1996. Sales through the Company's
long distance and network services operation have increased from 0.7% of net
sales in 1993 to 6.5% of net sales in 1996.
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Sales of systems through the Company's direct dealers typically
generate lower gross margins than sales through the Company's direct sales
organization, although direct sales typically require higher levels of sales,
marketing, general and administrative expenses. Accordingly, the Company's
margins may vary from period to period depending upon the mix of dealer and
direct sales. Direct dealers and VARs typically enter into non-exclusive
reseller contracts for a term of one or more years. The Company generally
provides support and other services to the reseller pursuant to the terms of the
agreement. The agreements often include requirements that the reseller meet or
use its best efforts to meet minimum annual purchase quotas. The Company's
experience is that dealers and VARs maintain low inventories of the Company's
products and, accordingly, the Company has experienced insignificant stock
rotation returns and price protection credits to date.
International sales, which to date have been made through the Company's
United Kingdom and Japan subsidiaries, accounted for approximately 1.5%, of net
sales in 1996. In order to sell its products to customers in other countries,
the Company must comply with local telecommunications standards. The Company's
AXXESS system can be readily altered through software modifications, which the
Company believes will facilitate compliance with these local regulations. The
Company had previously experienced delays in the United Kingdom in achieving
final regulatory approval of its products; however, approvals were received
during 1996 to market and sell the Company's digital product lines. In addition,
the AXXESS system has been designed to support multi-lingual functionality, and
currently supports English and Japanese. The Company is presently establishing
dealer networks in Japan and Asia and is working to expand its dealer network in
the United Kingdom and Europe.
Research and Development
The Company's research and development efforts over the last several
years have been focused primarily on developing new products like the Inter-Tel
Axxent system, enhancing the CTI capabilities of the AXXESS product, as well as
expanding the capacity of the Company's AXXESS and AXXESSORY Talk systems.
Current efforts are related to support of industry standard CTI interfaces,
development of additional applications and features, the development of an
Internet voice server (Vocal'Net server), and the development of a LAN-based
Communications Server incorporating the Company's Call Processing and Voice
Processing software. New applications under development also include Basic Rate
ISDN, telecommunications networking, and unified messaging software. The
software-based architecture of the AXXESS system facilitates maintenance and
support, upgrades, and incorporation of additional features and functionality.
The Company had a total of 95 personnel engaged in research and
development as of December 31, 1996. Research and development expenses were
$6,581,711, $5,763,517 and $4,536,882 for 1996, 1995 and 1994, respectively.
Manufacturing
The Company manufactures substantially all of its systems through third
party subcontractors located in the United States, China and the Philippines.
These subcontractors use both standard and proprietary integrated circuits and
other electronic devices and components to produce telephone switches,
telephones and printed circuit boards to the Company's engineering
specifications and designs. The suppliers also inspect and test the equipment
before delivering them to the Company, which in some cases then performs systems
integration, software loading, final testing and shipment. The Company maintains
written
10
agreements with its principal suppliers. The Company provides a forecast
schedule to its suppliers and revises the forecast on a periodic basis.
Foreign manufacturing facilities are subject to changes in governmental
policies, imposition of tariffs and import restrictions, and other factors
beyond the Company's control. Certain of the microprocessors, integrated
circuits and voice processing interface cards used in the Company's systems are
currently available from a single or limited sources of supply. From time to
time, the Company experiences delays in the supply of components and finished
goods. Delay or lack of supply from existing sources or the inability to develop
alternative sources if and when required in the future could materially and
adversely affect operating results.
Customer Service and Support
The Company believes that customer service and support is a critical
component of customer satisfaction and the success of the Company's business.
The Company operates a Technical Support "hotline" to provide a range of
telephone support to its distributors, dealers and end user customers through a
toll-free number. The Company also provides on-site customer support and,
through remote diagnostic procedures, has the ability to detect and correct
system problems from its Technical Support facilities.
Information taken from customer call records allows feedback into
Inter-Tel's Quality First continuous improvement process, thus providing a road
map for continuous product and service enhancements. Each direct sales office is
given a periodic service activity report summarizing the reasons that
technicians are asking for assistance and common issues that give rise to
technical inquiries. This allows them to analyze trends in their service
operations and provide better customer service.
Quality
The Company believes that the quality of its systems, customer service
and support, and other aspects of its organization is a critical element of
meeting the needs of its customers. Through its Quality First continuous
improvement process initiated in 1991, Inter-Tel implements quality processes
throughout its business operations. The Company has established formal
procedures to ensure responsiveness to customer requests, to monitor response
times and to measure customer satisfaction. The Company has also established
means by which all end users, including customers of the Company's resellers,
can make product enhancement requests directly to the Company. The Company
supports its dealers and VARs through an extensive training program at the
Company's facility and at dealer sites, a toll-free telephone number for sales
and technical support, and the provision of end user marketing materials. The
Company typically provides a one year warranty on its systems to end users. In
manufacturing, the Company continuously monitors the quality of the products
produced on its behalf by the Company's manufacturing subcontractors, and is
extending the Company's Quality First continuous improvement process to its
suppliers.
Competition
The market for the Company's products is highly competitive and in
recent periods has been characterized by pricing pressures and business
consolidations. The Company's competitors include Lucent Technologies (formerly
AT&T) and NorTel (formerly Northern Telecom), as well as Comdial, Executone,
Iwatsu, Mitel, NEC, Nitsuko, Panasonic, ROLM, Toshiba and others. Many of these
competitors have significantly greater financial, marketing and technical
resources than the Company. The Company also competes against the
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regional Bell operating companies (RBOCs), which offer systems produced by one
or more of the aforementioned competitors and also offer Centrex systems in
which automatic calling facilities are provided through equipment located in the
telephone company's central office.
The Telecommunication Act of 1996 and AT&T's announcement to divide
itself into three enterprises has had an impact on competition in the
communication industry. The Telecommunication Act of 1996 opened the market for
telephone and cable television services, forcing telephone companies to open
their networks to competitors and giving consumers a choice of local phone
carriers. Conversely, local phone companies are now able to offer long distance
services. In addition, cable companies can offer telephone services and Internet
access. These changes will increase competition in the communication industry
and will create additional competition and opportunities in customer premise
equipment as these new services and interfaces become available.
In the market for voice processing applications, including voice mail,
the Company competes against Centigram Communications Corporation, Octel
Corporation, AVT and other competitors, certain of which have significantly
greater resources than the Company. In the market for long distance services,
the Company competes against AT&T, MCI, US Sprint and other competitors, many of
which have significantly greater resources than the Company. With the recent
Telecommunications Act, the Company will also compete with RBOCs and cable
companies for long distance business. Key competitive factors in the sale of
telephone systems and related applications include performance, features,
reliability, service and support, name recognition, distribution capability and
price. The Company believes that it competes favorably in its markets with
respect to the performance, features and price of its systems, as well as the
level of service and support that the Company provides to its customers. Certain
of the Company's competitors have significantly greater name recognition and
distribution capabilities than the Company, although the Company believes that
it has developed a competitive distribution presence in certain markets,
particularly those where the Company has direct sales offices. The Company
expects that competition will continue to be intense in the markets addressed by
the Company, and there can be no assurance that the Company will be able to
continue to compete successfully.
As the Company enters the markets for local telephone service and
Internet access, it will face additional competition from RBOCs and other
providers, which have larger marketing and sales organizations, significantly
greater financial and technical resources and a larger and more established
customer base than the Company. In addition, RBOCs and other providers have
greater name recognition, more established positions in the market and long
standing relationships with customers. Therefore, there can be no assurance that
the Company will compete successfully in these markets.
To the extent that Inter-Tel develops more server-based
telecommunications products, Inter-Tel's competition will be the large computer
software companies, such as IBM (Lotus), and Microsoft. In addition, the
server-based telephony market has shown increasing competition from small
software start-up companies.
Intellectual Property Rights
In addition to the factors discussed above, the Company's ability to
compete successfully depends on its ability to protect the proprietary
technology contained in its products. The Company relies principally upon a
combination of copyright and trade secret laws and contractual provisions to
establish and protect its proprietary rights in its systems. The Company
generally enters into confidentiality agreements with its employees and
suppliers, and limits access to its proprietary information. There can be no
assurance that these protections will be adequate to deter misappropriation of
the Company's technologies or independent third party development of similar
technologies or product features.
12
From time to time, the Company is subject to assertions that the
Company's products infringe the intellectual property rights of third parties.
Such claims could require the Company to expend significant sums in litigation,
could require the Company to pay damages, and could require the Company to
develop non-infringing technology or to acquire licenses to the technology which
is the subject of the claimed infringement.
Employees
As of December 31, 1996, the Company had a total of 1,193 employees, of
whom 972 were engaged in sales, marketing and customer support, 58 in quality,
manufacturing and related operations, 95 in research and development, and 68 in
finance and administration. The Company's future success will depend upon its
ability to attract, retain and motivate highly qualified employees, who are in
great demand. The Company believes that its employee relations are excellent.
Factors That May Affect Results of Future Operations
In evaluating the Company's business, prospective investors should
carefully consider the following factors in addition to the other information
presented in this Form 10-K.
Rapid Technological Change and Dependence on New and Timely Product
Introductions
The market for the Company's software, products and services is
characterized by rapid technological change and continuing demand for new
products, features and applications. Current competitors or new market entrants
may develop new products or product features that could adversely affect the
competitive position of the Company's products. Accordingly, the timely
introduction of new products and product features, as well as new
telecommunications applications, will be a key factor in the Company's future
success. Occasionally, new products contain undetected errors or "bugs" when
released. Such bugs may result from defects contained in software products
offered by the Company's suppliers or other third parties that are intended to
be compatible with the Company's products, over which the Company has little or
no control. Although the Company seeks to minimize the number of bugs in its
products by its test procedures and strict quality control, there can be no
assurance that its new products will be error free when introduced. Any
significant delay in the commercial introduction of the Company's products due
to bugs, any design modifications required to correct bugs or any impairment of
customer satisfaction as a result of bugs could have a material adverse effect
on the Company's business and operating results. In addition, new products often
take several months before their manufacturing costs stabilize, which may
adversely affect operating results for a period of time following introduction.
During the past twelve months, the Company introduced ISDN on its AXXESS digital
communication platform, expanded the size of the AXXESS and Inter-Tel Axxent
platforms, introduced a number of upgrades to its existing AXXESSORY Talk and
IVX-500 voice processing platforms and announced the introduction of the
Vocal'Net Server product. In the event that the Company were to fail to
successfully introduce new software, products or services or upgrades to its
existing systems or products on a regular and timely basis, demand for the
Company's existing software, products and services could decline, which could
have a material adverse effect on the Company's business and operating results.
Additionally, there can be no guaranty that future costs of accessibility, lack
of capacity or voice transmission quality of the Internet will not adversely
affect the ability of the Company to deliver all Internet products and services
on a cost effective basis. There can be no assurance that the Company will be
able to successfully develop new software, products, services, technologies and
applications on a timely basis as required by changing market needs or that new
software or products or enhancements
13
thereto, including its recently announced products and upgrades, when introduced
by the Company, will achieve market acceptance.
The Company has recently developed and continues to develop products
designed to address the emerging market for the convergence of voice and data
applications, or computer telephony integration. If the computer telephony
integration ("CTI") market fails to develop or grows more slowly than the
Company anticipates, or if the Company is unable for any reason to capitalize on
this emerging market opportunity, the Company's business and operating results
could be materially adversely affected.
Dependence Upon Contract Manufacturers and Component Suppliers
Certain components used in the Company's digital communication
platforms, including certain microprocessors, integrated circuits, power
supplies and voice processing interface cards, are currently available from a
single source or limited sources of supply, and product availability could be
limited. In addition, the Company currently manufactures its products through a
limited number of contract manufacturers located in the United States, the
Philippines and the People's Republic of China. Foreign manufacturing facilities
are subject to changes in governmental policies, imposition of tariffs and
import restrictions and other factors beyond the Company's control. Varian
Associates, Inc. ("Varian") currently manufactures a significant portion of the
Company's products at Varian's Tempe, Arizona facility, including substantially
all of the printed circuit boards used in the AXXESS and Inter-Tel Axxent
digital communications platforms. From time to time, the Company has experienced
delays in the supply of components and finished goods, and there can be no
assurance that the Company will not experience such delays in the future. The
Company's reliance on third party manufacturers involves a number of additional
risks, including reduced control over delivery schedules, quality assurance and
costs. Any delay in delivery or shortage of supply of components or finished
goods from Varian or any other supplier, or the Company's inability to develop
in a timely manner alternative or additional sources if and when required, could
damage the Company's relationships with current and prospective customers and
could materially and adversely affect the Company's business and operating
results. The Company has no long term agreements with its suppliers that require
the suppliers to provide fixed quantities of components or finished goods at set
prices. There can be no assurance that the Company will be able to continue to
obtain components or finished goods in sufficient quantities or quality or on
favorable pricing and delivery terms in the future.
Competition
The market for the Company's digital communications platforms is highly
competitive and in recent periods has been characterized by pricing pressures
and business consolidations. The Company's competitors include Lucent
Technologies and Northern Telecom Limited ("NorTel"), as well as Comdial
Corporation ("Comdial"), EXECUTONE Information Systems, Inc. ("Executone"),
Mitel Corporation ("Mitel"), Panasonic, Siemens ROLM Communications Inc.
("ROLM"), Toshiba and others. The Company also competes against the regional
Bell operating companies ("RBOCS"), which offer systems produced by one or more
of the aforementioned competitors and also offer Centrex systems in which call
processing facilities are provided through equipment located in the telephone
company's central office. Competition by the RBOCs may increase significantly in
the future, as the RBOCs have been granted the right to manufacture telephone
systems and equipment themselves and/or to bundle the sale of equipment with
telephone calling services.
The Telecommunication Act of 1996 and AT&T's announcement to divide
itself into three enterprises has had an impact on competition in the
communication industry. The
14
Telecommunication Act of 1996 opened the market for telephone and cable
television services, forcing telephone companies to open their networks to
competitors and giving consumers a choice of local phone carriers. Conversely,
local phone companies are now able to offer long distance services. In addition,
cable companies can offer telephone services and Internet access. These changes
will increase competition in the communication industry and will create
additional competition and opportunities in customer premise equipment as these
new services and interfaces become available. As the Company enters the markets
for local telephone service and Internet access, it will face additional
competition from RBOCs and other providers, which have larger marketing and
sales organizations, significantly greater financial and technical resources and
a larger and more established customer base than the Company. In addition, RBOCs
and other providers have greater name recognition, more established positions in
the market and long standing relationships with customers. Therefore, there can
be no assurance that the Company will compete successfully in these markets.
In the market for voice processing applications, including voice mail,
the Company competes against Centigram Communications Corporation ("Centigram"),
Octel Communications Corporation ("Octel"), Active Voice Corporation ("Active
Voice"), Applied Voice Technology, Inc. ("AVT") and other competitors, including
telephone systems manufacturers such as Lucent Technologies, NorTel and ROLM,
which offer integrated voice processing systems under their own label as well as
through various OEM arrangements. Certain of the Company's competitors may
achieve marketing advantages by bundling their voice processing equipment with
sales of telephone systems, or by designing their telephone systems so that they
do not readily integrate with independent voice processing systems. Inter-Tel
expects that the development of industry standards and the acceptance of open
systems architectures in the voice processing market will reduce technical
barriers to market entry and lead to increased competition.
In the market for long distance services, the Company competes against
AT&T Corp., MCI Telecommunications Corporation, Sprint Corporation and other
suppliers, certain of which also supply the long distance calling and network
services that the Company resells. Although the Company acquires a variety of
long distance calling services in bulk from certain long distance carriers,
there can be no assurance that the Company will be able to purchase long
distance calling services on favorable terms from one or more of such providers
in the future. In addition, a substantial majority of prospective new long
distance customers for the Company currently purchase long distance calling
services from the Company's competitors. The Company believes that it is likely
to face increased competition in the long distance calling services market as a
result of telecommunications deregulation, which enables RBOCs to supply long
distance calling and network services, and enables RBOCs and others to bundle
long distance, local telephone and wireless services. Moreover, the Company
expects to face increased competition in the future because low technical
barriers to entry will allow new market entrants.
As Inter-Tel develops more server-based and CTI telecommunications
products, Inter-Tel's competition will be the large computer software companies,
such as IBM (Lotus), and Microsoft. In addition, the server-based telephony and
CTI markets have shown increasing competition from small software start-up
companies.
Many of the Company's competitors are substantially larger, and have
significantly greater financial and technical resources, name recognition and
marketing and distribution capabilities, than the Company. The Company expects
that competition will continue to be intense in the markets addressed by its
products and services, and there can be no assurance that the Company will be
able to compete successfully in the future.
Management of Growth; Implementation of New Management Information Systems
The growth in the Company's business has placed, and is expected to
continue to place, a significant strain on the Company's personnel, management
and other resources. The
15
Company's ability to manage any future growth effectively will require it to
attract, train, motivate and manage new employees successfully, to integrate new
employees into its overall operations and to continue to improve its
operational, financial and management information systems.
The Company implemented a new MIS system late in 1995. The MIS system
significantly affected many aspects of the Company's business, including its
accounting, operations, purchasing, sales and marketing functions. Since the
date of implementation, the Company has experienced difficulty with the new MIS
system software, which increased the Company's costs, had an adverse effect on
the Company's ability to provide products and services to its customers on a
timely basis and caused delays in coordinating accounting and financial results.
During the fourth quarter of 1996, the Company determined that the limitations
of the existing system software would prevent Inter-Tel from establishing an
integrated and centralized dispatch and telemarketing center.
During the fourth quarter of 1996, the Company decided to replace its
MIS system software with an integrated solution from a more established vendor
and accordingly has written off the software license and implementation costs
relating to the system software being replaced. Inter-Tel has signed an
agreement with a large, established software and database vendor to implement,
maintain and support alternate MIS system software to be utilized throughout the
Company. Inter-Tel believes that such action was necessary to allow for the
stability and growth of Inter-Tel.
The actions to replace the MIS system software could result in additional
costs and probable delays in obtaining a fully functional MIS system, including
but not limited to additional or alternate hardware and software required, but
not available in the current system configuration, and additional personnel,
which could have a material adverse effect on the company's business and
operating results. In addition, implementation of this system software and the
transition from the current system software to the new information system
software will require substantial financial resources and personnel.
The Company has made strategic acquisitions in the past and expects to
continue to do so in the future. Acquisitions require a significant amount of
the Company's management attention and financial and operational resources, all
of which are limited. The integration of acquired entities may also result in
unexpected costs and disruptions, and significant fluctuations in, or reduced
predictability of, operating results from period to period. There can be no
assurance that an acquisition will not adversely affect the business
relationships of the Company or the acquired entity with their respective
suppliers or customers. Further, there can be no assurance that the Company will
successfully integrate the acquired operations or achieve any of the intended
benefits of an acquisition. The Company's failure to manage its growth
effectively could have a material adverse effect on its business and operating
results.
Product Protection and Infringement
The Company's future success is dependent in part upon its proprietary
technology. The Company has no patents and relies principally on copyright and
trade secret law and contractual provisions to protect its intellectual
property. There can be no assurance that any copyright owned by the Company will
not be invalidated, circumvented or challenged or that the rights granted
thereunder will provide competitive advantages to the Company. Further, there
can be no assurance that others will not develop technologies that are similar
or superior to the Company's technology or that duplicate the Company's
technology.
16
As the Company expands its international operations, effective
intellectual property protection may be unavailable or limited in certain
foreign countries. There can be no assurance that the steps taken by the Company
will prevent misappropriation of its technology. Litigation may be necessary in
the future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity.
Such litigation or delays in product introductions or decisions to discontinue
development, manufacture or sale of such products, could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business and operating results.
Reliance on Dealer Network
A substantial portion of the Company's net sales are made through its
network of independent dealers. The company faces intense competition from other
telephone system and voice processing system manufacturers for such dealers'
business, as most of the Company's dealers carry products which compete with the
Company's products. The Company has no exclusive agreements with any of its
dealers. The loss of any significant dealer or group of dealers, or any event or
condition adversely affecting the Company's dealer network, could have a
material adverse effect on the Company's business and operating results.
Risks of Providing Long Distance and Network Services
Inter-Tel depends on a reliable supply of telecommunications services
and information from several long distance carriers. Because it does not own
transmission facilities, the Company relies on long distance carriers for the
provision of network services to the Company's customers and for billing
information. Long distance services are subject to extensive and uncertain
governmental regulation on both the federal and state level. There can be no
assurance that the promulgation of certain regulations will not adversely affect
the Company's business and operating results. Contracts with the long distance
carriers from which the Company currently resells services typically have a
multi-year term in which the Company's prices are relatively fixed and have
minimum use requirements. There can be no assurance that the Company will meet
minimum use commitments, will be able to negotiate lower rates with carriers in
the event of any decrease in end user rates or will be able to extend its
contracts with long distance carriers at prices favorable to the Company. The
Company's ability to continue to expand its long distance service operations
will depend on its ability to continue to secure reliable long distance services
from a number of long distance carriers and the willingness of such carriers to
continue to make telecommunications services and billing information available
to the Company on favorable terms.
Dependence on Key Personnel
The Company is dependent on the continued service of, and its ability
to attract and retain, qualified technical, marketing, sales and managerial
personnel. The competition for such personnel is intense, and the loss of any of
such persons, as well as the failure to recruit additional key technical and
sales personnel in a timely manner, would have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to continue to attract and retain the qualified personnel
necessary for the development of its business.
Possible Volatility of Stock Price
The Company believes that factors such as announcements of
developments relating to the Company's business, fluctuations in the Company's
operating results, general conditions in
17
the telecommunications industry or the worldwide economy, changes in legislation
or regulation affecting the telecommunications industry, an outbreak of
hostilities, a shortfall in revenue or earnings from securities analysts'
expectations, announcements of technological innovations or new products or
enhancements by the Company or its competitors, developments in intellectual
property rights and developments in the Company's relationships with its
customers and suppliers could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially. Many of such factors are beyond the Company's
control. In addition, in recent years the stock market in general, and the
market for shares of technology stocks in particular, have experienced extreme
price fluctuations, which have often been unrelated to the operating performance
of affected companies. There can be no assurance that the market price of the
Company's Common Stock will not experience significant fluctuations in the
future, including fluctuations that are unrelated to the Company's performance.
Concentration of Ownership
As of December 31, 1996, the Company's Chairman of the Board of Directors and
Chief Executive Officer beneficially owned approximately 21% of the outstanding
shares of the Common Stock. As a result, he has the ability to exercise
significant influence over all matters requiring shareholder approval. In
addition, the concentration of ownership could have the effect of delaying or
preventing a change in control of the Company.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
- - ---- --- --------
Steven G. Mihaylo 53 Chairman of the Board of
Directors and Chief
Executive Officer
Thomas C. Parise 42 President and Chief
Operating Officer
Craig W. Rauchle 41 Executive Vice President
Ross McAlpine 45 President of Inter-Tel
Leasing, Inc.
Kurt R. Kneip 34 Vice President, Chief
Financial Officer, Secretary
and Assistant Treasurer
J. Robert Anderson 60 Director
Gary Edens 55 Director
Maurice H. Esperseth 71 Director
C. Roland Haden 56 Director
Norman Stout 39 Director
MR. MIHAYLO, the founder of the Company, has served as Chairman of the
Board of Directors of the Company since September 1983, as President from March
1984 until December 1994, and as Chief Executive Officer of the Company since
its formation in July 1969. Mr. Mihaylo also served as President of the Company
from July 1969 until September 1983 and as Chairman of the Board of Directors
from July 1969 to October 1982. Mr. Mihaylo also is a director of MicroAge, Inc.
and Microtest, Inc.
18
MR. PARISE was elected President of the Company in December 1994. He
has been Senior Vice President of the Company since 1986. He is also President
of Inter-Tel Integrated Services, Inc., a wholly owned research and development,
manufacturing and distribution subsidiary of the Company. Mr. Parise joined the
Company in 1981 and became Branch General Manager of the Phoenix Direct Sales
Office in 1982. In 1983, he became the Mountain Regional Vice President, and in
January 1985 he was appointed Vice President of Operations and Sales Support.
Mr. Parise also is a director of Globe Business Resources, Inc.
MR. RAUCHLE was elected Executive Vice President in December 1994. He
had been Senior Vice President of the Company and continues as President of
Inter-Tel DataCom, Inc., a wholly owned sales subsidiary of the Company. In
addition, he currently serves the Company and all subsidiaries in corporate
strategic planning and mergers and acquisitions activities. Mr. Rauchle joined
the Company in 1979 as Branch General Manager of the Denver Direct Sales Office
and in 1983 was appointed the Central Region Vice President and subsequently the
Western Regional Vice President. From 1990 to 1992, Mr. Rauchle served as
President of Inter-Tel Communications, Inc.
MR. MCALPINE has served as President of Inter-Tel Leasing, Inc., a
wholly-owned subsidiary of the Company, since April 1993. He also served as Vice
President of Inter-Tel Communications, Inc. from April 1991 to April 1992 and
Treasurer since April 1992. He joined the Company in July 1991 when Inter-Tel
acquired Telecommunications Specialists, Inc. Prior to joining Inter-Tel, Mr.
McAlpine worked 17 years in the leasing and financial services industry. Mr.
McAlpine holds an undergraduate degree in Accounting from Southwest Texas State
University.
MR. KNEIP has served as Vice President and Chief Financial Officer of
the Company since September 1993. He was elected Secretary and Treasurer in
October 1994. In May 1996 he was elected Assistant Treasurer, as John Abbott was
elected Treasurer. He joined the Company in May 1992 as Director of Corporate
Tax, after seven years with the accounting firm of Ernst & Young. Mr. Kneip is a
Certified Public Accountant, and holds an undergraduate degree in Commercial
Economics from South Dakota State University and a Masters Degree in
Professional Accountancy from the University of South Dakota.
MR. ANDERSON was elected as a director of the Company in February 1997.
Mr. Anderson worked for Ford Motor Company from 1963 to 1983, serving from 1978
to 1983 as President of the Ford Motor Land Development Corporation. He served
as Senior Vice President,
19
CFO and a member of the Board of Directors of The Firestone Tire and Rubber
Company from 1983 to 1989, and as Vice Chairman of Bridgestone/Firestone, Inc.
from 1989 through 1991. He most recently served as Vice Chairman, CFO and a
member of the Board of Directors of the Grumman Corporation from 1991 to 1994.
Mr. Anderson is currently semi-retired, and he is an active leader in various
business, civic and philanthropic organizations.
MR. EDENS was elected as a director of the Company in October 1994. He
has been a broadcasting media executive from 1970 to 1994, serving as Chairman
and Chief Executive Officer of Edens Broadcasting, Inc. from 1984 to 1994 when
that corporation's nine radio stations were sold. He presently is President of
The Hanover Companies, Inc., an investment firm. He is an active leader in
various business, civic and philanthropic organizations.
MR. ESPERSETH has been a director of the Company since October 1986.
Mr. Esperseth joined the Company in January 1983 as Senior Vice
President-Research and Development, after a 32-year career with GTE, and served
as Executive Vice President of Inter-Tel from 1986 to 1988. Mr. Esperseth
retired as an officer of the Company on December 31, 1989.
DR. HADEN has been a director of the Company since 1983. Dr. Haden has
been Vice Chancellor and Dean of Engineering of Texas A&M University since 1993.
Previously, he served as Vice Chancellor of Louisiana State University from 1991
to 1993, Dean of the College of Engineering and Applied Sciences at Arizona
State University from 1989 to 1991, Vice President for Academic Affairs at
Arizona State University from 1987 to 1988, and Dean of the College of
Engineering and Applied Sciences from 1978 to 1987. Dr. Haden holds a doctoral
degree in Electrical Engineering from the University of Texas and has served on
the faculties of the University of Oklahoma and Texas A & M University.
MR. STOUT was elected a director of the Company in October 1994. Mr.
Stout has been President of Superlite Block, a manufacturer of concrete block
since February 1993. Prior thereto he was employed by Bouhem-Fields, Inc. of
Dallas, Texas, a manufacturer of crushed stone, as Chief Executive Officer from
1990 to 1993 and as Chief Financial Officer from 1986 to 1990. Previously, Mr.
Stout was a Certified Public Accountant with Coopers & Lybrand.
The Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Directors Anderson, Stout and
Esperseth, is charged with reviewing the Company's annual audit and meets with
the Company's independent auditors to review the Company's internal controls and
financial management practices. The Compensation Committee, consisting of
Messrs. Esperseth, Edens and Stout, recommends to the Board of Directors
compensation for the Company's key employees and administers the Company's stock
option plans.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters at 120 North 44th
Street, Suite 200, Phoenix, Arizona pursuant to a lease that expires in 2000. It
also maintains its distribution and support operations in an 85,000 square foot
building located in Chandler, Arizona pursuant to a lease that expires in 2008.
In addition, the Company leases sales and support offices in a total of 29
direct sales offices in the United States and two locations overseas. The
Company's aggregate monthly payments under these leases are currently $239,092.
The Company believes that its existing facilities are adequate to meet its
current needs and that additional or alternative space will be available as
necessary in the future on commercially reasonable terms.
20
ITEM 3. LEGAL PROCEEDINGS
The Company has no legal proceedings in process or pending for which it
believes an unfavorable outcome would have a material adverse impact on the
financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference
to Exhibit 13.0 and Page 38 of the Company's 1996 Annual Report to
Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference
to Exhibit 13.0 and Page 18 of the Company's 1996 Annual Report to
Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference
to Exhibit 13.0 and Pages 30 through 37 of the Company's 1996
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference
to Exhibit 13.0 and Pages 19 through 29 of the Company's 1996
Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and the information included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors and executive officers is
included at the end of Part I, Item 1 on Pages 18 to 20 of this
report under the caption "Directors and Executive Officers of the
Registrant."
21
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
to Pages 8 to 11 of the Company's Proxy Statement relating to its
1997 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference
to Pages 5 and 6 of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
The following consolidated financial statements of Inter-Tel,
Incorporated, and subsidiaries, are incorporated by reference to
Exhibit 13.0 and Pages 19 to 29 of the Company's Annual Report:
Report of Ernst & Young LLP, Independent Auditors
Consolidated balance sheets--December 31, 1996 and 1995
Consolidated statements of income--years ended December 31, 1996,
1995 and 1994
Consolidated statements of shareholders' equity--years ended December
31, 1996, 1995 and 1994
Consolidated statements of cash flows--years ended December 31,
1996, 1995 and 1994
Notes to consolidated financial statements
2. Financial Statement Schedules
The following consolidated financial statement schedule of Inter-Tel,
Incorporated, and subsidiaries is filed as part of this Report and
should be read in conjunction with the Consolidated Financial
Statements of Inter-Tel, Incorporated and subsidiaries, and the notes
thereto.
22
Schedule for the three years ended December 31, 1996:
Page No.
--------
Schedule II--Valuation and Qualifying Accounts 25
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.
3. Exhibits
3.1(10) Articles of Incorporation, as amended.
3.2(16) By-Laws, as amended.
10.15(1) Registrant's form of standard Distributor Agreement.
10.16(1) Registrant's form of standard Service Agreement.
10.34(2) 1984 Incentive Stock Option Plan and forms of Stock
Option Agreement.
10.35(3) Agreement between Registrant and Samsung Semiconductor
and Telecommunications Company, Ltd. dated October 17,
1984.
10.37(3) Tax Deferred Savings Plan.
10.51(11) 1990 Directors' Stock Option Plan and form of Stock
Option Agreement.
10.52(15) Inter-Tel, Incorporated Long-Term Incentive Plan and
forms of Stock Option Agreements.
10.53(12) Agreement between Registrant and Maxon Systems, Inc.
dated February 27, 1990.
10.54(12) Agreement between Registrant and Varian Tempe
Electronics Center dated February 26, 1991.
10.55(12) Agreement between Registrant and Jetcrown Industrial
Ltd. dated February 18, 1993.
10.56(13) Employee Stock Ownership Plan.
10.57(14) Loan and Security Agreement dated December 16, 1994
between Bank One, Arizona, N.A. and Registrant.
10.58(16) Development, Supply and License Agreement between
Registrant and QUALCOMM dated January 17, 1996.
- - ---------------------
23
(1) Previously filed with Registrant's Registration Statement on Form S-1 (File
No. 2-70437).
(2) Previously filed with Registrant's Registration Statement on Form S-8 (File
No. 2-94805).
(3) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended November 30, 1984 (File No. 0-10211).
(10) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1988 (File No. 0-10211).
(11) Previously filed with Registrant's Registration Statement on Form S-8 (File
No. 33-40353).
(12) Previously filed with Registrant's Registration Statement on Form S-1 (File
No. 33-70054).
(13) Previously filed with Registrant's Registration Statement on Form S-8 (File
No. 33-73620).
(14) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 (File No. 0-10211).
(15) Previously filed with Registrant's Proxy Statement dated March 23, 1994.
(16) Previously filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 0-10211).
(17) Filed herewith.
(b) Reports on Form 8-K.
None
(c) Exhibits.
11.1 Statement re: Computation of Per Share Earnings.
13.0 Excerpts from Annual Report to Security Holders.
22.1 List of Subsidiaries.
23.0 Consent of Independent Auditors.
24.1 Power of Attorney.
27 Financial Data Schedule
See Item 14(a) (3) also.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report. See Item 8.
24
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
- - -----------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- - -----------------------------------------------------------------------------------------------------------
ADDITIONS
- - -----------------------------------------------------------------------------------------------------------
Charged Charged to
Balance at to Other Charged to Balance
Beginning Costs & Accounts Deductions at End of
DESCRIPTION of Period Expenses Describe Describe Period
- - -----------------------------------------------------------------------------------------------------------
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for doubtful
accounts (4) $1,822 $1,801 $ 87(3) $ 614(1) $3,096
------ ------ -------- -------- ------
Allowance for lease
accounts $1,513 $1,945 $ (87)(3) $ 665(1) $2,706
------ ------ -------- -------- ------
Inventory allowance (4) $2,499 $ 609 $ 175(5) $ 304(2) $2,979
------ ------ -------- -------- ------
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful
accounts (4) $1,181 $ 814 $ 71(3) $ 244(1) $1,822
------ ------ -------- -------- ------
Allowance for lease
accounts $1,198 $ 780 $ (71)(3) $ 394(1) $1,513
------ ------ -------- -------- ------
Inventory allowance (4) $1,795 $1,109 -- $ 405(2) $2,499
------ ------ -------- -------- ------
Year ended December 31, 1994
Deducted from asset accounts:
Allowance for doubtful
accounts (4) $ 708 $ 721 $ (105)(3) $ 143(1) $1,181
------ ------ -------- -------- ------
Allowance for lease
accounts $ 911 $ 236 $ 105(3) $ 54(1) $1,198
------ ------ -------- -------- ------
Inventory allowance (4) $1,237 $ 561 -- $ 3(2) $1,795
------ ------ -------- -------- ------
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory written off.
(3) Reclassed between appropriate valuation and qualifying accounts.
(4) Adjusted for pooling of Florida Telephone Systems, Inc.
(5) Acquired in purchase of NTL Corporation (dba ComNet of Ohio).
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Inter-Tel, Incorporated, has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTER-TEL, INCORPORATED
BY: /S/ Steven G. Mihaylo
------------------------------------
Steven G. Mihaylo
Chairman and Chief Executive Officer
Dated: March 21, 1997
26
INDEX OF ATTACHED EXHIBITS
11.1 Statement re: Computation of Per Share Earnings (included on Page 28)
13.0 Excerpts from Annual Report to Security Holders (pages 29 to 50)
22.1 List of Subsidiaries (included on Page 51)
23.0 Consent of Independent Auditors (included on Page 52)
24.1 Power of Attorney (included on Page 53)
27 Financial Data Schedule (Page 54)
27